Nike - Out with the New in with the Old

The tenure of William Perez as the CEO of Nike (NKE) ended only 13 months after he took over for Phil Knight - the company's founder. The reasoning behind the resignation stemmed from a clash between Perez and Knight on how to run the company. Here we'll take a look at the differing views and weigh in on whether or not it was the right move for Perez to go.

Under Knight the strategy at Nike was to forge sales through sleek advertising campaigns and a large portfolio of athlete endorsements. This strategy produced the highly successful "Just Do It" campaign, along with endorsement deals with superstars such as Michael Jordan and Tiger Woods. The strategy has not been an inexpensive one, as the company spent $1.6B in fiscal 2005 on "demand creation." The strong branding strategy has been a major factor behind Nike becoming the largest apparel footwear company in the world. The company's annual revenue was $13.7B in fiscal 2005, up from $12.3B in 2004, an 11% increase.

When Phil Knight finally gave up the helm of Nike in 2004, the choice of William Perez was surprising to both employees and the market. At the time there were a lot of questions on whether Perez would be able to integrate himself and his strategy into the well ingrained Nike culture. Before heading Nike, Perez was the CEO of S.C. Johnson & Sons, a global household products company (Ziploc, Drano, etc.).

Perez was brought in by Knight to bring a more disciplined organizational and managerial style to the company, while respecting the company's innovative roots. Perez focused on cutting costs and working on distribution efficiencies to unlock value. An area that Perez looked to make cuts was in the $1.6B "demand creation," expenditure, however this concept faced stiff opposition in the company. It appears that Perez was unable to bridge the gap between a more restrictive management style, one of cost cutting and efficiencies, and the innovative (and expensive) marketing culture of Nike.

Knight's hiring of Perez, even though unsuccessful, is a good sign that Nike understands that it won't be able to market their way to success indefinitely. The company will need to focus more and more on organizational efficiencies, ensuring that the money being spent is creating value for shareholders. This has become a focal point recently as the company has had problems with marketing campaigns in Japan and faces stiffening competition. The pending merger between Adidas-Salomon (ADDYY) and Reebok (RBK) will allow the newly formed company to better compete with Nike largely due to the resulting synergies and scale created.

Even though there are threats looming, I view the resignation of Perez as a positive. The company returns to their inner circle for talent with the promotion of long-time Nike executive Mark Parker as the new CEO. This removes the culture clash that resulted from the leadership of Perez and brings in a leader who better understands the dynamics of the organization. Looking forward the company should continue their focus on strong branding of their main Nike line along with their increasing portfolio of brands. But hopefully integrate cost cutting measures and greater organizational discipline - but at their own pace.